In the year 2018, we had written a blog on "Union Budget 2018 and Stock Markets". We are pleased to convey that most of our predictions in the said blog have come true. You may see the blog here Union Budget 2018 and stock markets
Since Feb 2018, small & midcaps have corrected by around 30-50%. Large caps are relatively stable. Investors are perplexed regarding what may happen post the biggest event in 2019. The general elections. Historically, stock markets tend to show weakness (and correction) pre-elections. And they go up post elections. This may or may not hold true in 2019. We look at 3 different scenarios and try to predict stock markets returns in 2019 and beyond.
Scenario 1: If current government gets 272+ seats: Probability 25%. This may be an ideal scenario for stock markets. Any government with full majority in Lok Sabha is great news for policy planners and law makers. More so, if the government is pro reforms & pro markets. In this scenario, stock markets will stay bullish. However, this has to be supported by strong earnings growth. And EPS growth for last 9 years is (NIFTY 50) low single digit.
Scenario 2: Coalition Government, UPA-III, or NDA-III. Probability 50%. This is not good news, especially when compared to scenario 1. Any coalition with multiple political parties will have vested interests. That may delay reforms and preparation and passing of important legislation. Moreover, a lot depends on the state of 2 national parties in the Coalition . If the Coalition is headed by a large national party (with 170+ seats) the stability will not be in question and the government will survive full term. In case of a week fragmented Coalition of a number of regional and small parties’ national interest might take a back stage.
Another point worth mentioning will be the numbers in the Rajya Sabha. The current government will have majority in Rajya Sabha by 2020. And in case of UPA-III in 2019, passage of important legislation may be get stalled/delayed. In such a scenario, stocks might detract and a lot of stocks might get de-rated. Markets might stay range bound and wait for earnings to revive.
Scenario 3: Coalition of several regional parties- Probability 25%
This is certainly bad news for the economy as well as stock markets. Socialist, leftist policies may weaken sentiments of both FII’s and domestic investors. Only a strong and decisive revival of earnings may improve sentiment and stock prices.